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surplus reinsuranceForm of proportional reinsurance in which risks are reinsured above a specified amount.

surrender penaltyThe difference between the underlying value of a life insurance contract and the payment made to the policyholder, if the contract is terminated (surrendered) before maturity. Surrender penalties help the company recoup its initial expenses when the policyholder cancels the contract in the first few years.

surrender valueThe amount received by a policyholder if he/she decided to cancel the policy before maturity. Surrender values vary greatly, and may be poor in the first years before the insurance company has recouped its acquisition costs from the policy. Contracts without a savings component (e.g. term insurance) rarely have a surrender value. Products with no guaranteed surrender values give more flexibility to the insurance company for asset and liability management purposes, but in some markets consumer pressure has led to a removal of surrender penalties.

survival ratioA measure used in non-life insurance, which estimates how many years it would take for asbestos and environmental claims to exhaust the current level of loss reserves. It is calculated on the level of claims payments, for instance averaged over the last three years ('three-year survival ratio'). A three-year survival ratio of 10 indicates that it would take 10 years to exhaust reserves if annual claims payments remained the same as the average in the last three years. Everything else being equal, the higher the ratio, the lower the risk that further reserve strengthening on A&E business is needed.

tailIndicates how much time elapses between the moment a loss is incurred (say, an accident), and the settlement of losses by the insurer. See short-tail and long-tail business.

technical accountAccording to EU directives, the profit and loss account has to be separated between a non-life insurance technical account, a life insurance technical account, and a non-technical account. Insurance revenues and expenses are accounted for in the relevant technical account, the result of which flows into the non-technical account to calculate the profit for shareholders (or retained profit for a mutual). The non-technical account also includes non-insurance earnings and expenses, as well as earnings on shareholders' funds not attributable to insurance operations.

technical provisionsEU expression broadly equivalent to insurance liabilities, i.e. the value set aside to cover expected losses arising on a book of insurance policies.

technical resultThe balance of either the life or non-life technical account. See technical account.

term insuranceType of life insurance protection policy with no build-up of a cash value: the insurer only pays out in case of death within a specific period of time. A typical example is a policy guaranteeing the payment of a lump sum in case of death, with no benefit payable if the policyholder is alive at maturity.

terminal bonus (uk)In a life insurance with-profits policy, a benefit added to the sum assured at maturity. It is not guaranteed before maturity, but can make a large portion of the total payout to the policyholder.

tied agentPerson or company selling products from one insurance company. By comparison with a broker, the tied agent is linked to a specific provider.

total adjusted capital (tac)Commonly refers to an insurance company's capital base under Standard & Poor's capital adequacy model. It includes shareholders' funds and adjustments on equity, asset values and reserves.

treaty reinsuranceWith treaty reinsurance, specific categories of risks are transferred to a reinsurance company. The reinsurance company accepts taking on all the risks falling within the terms of the agreement.

triangle (loss triangle)It shows the development of loss reserves by line of business and year of occurrence. It shows how claims are paid out/reserved for from the time they are filed and the time they are settled, and is a tool used to measure the conservatism of an insurance company's provisions. The method used to determine claims provisions with loss triangles is called triangulation.

underwritingThe process of evaluating and pricing risks in insurance.

underwriting cycleThe non-life insurance and reinsurance markets have usually displayed signs of an underwriting cycle. In years of good investment returns, capital is abundant and excess supply drives premiums down (soft market). This ultimately leads to underwriting losses and forces insurance companies to increase premiums to improve their results and replenish their capital bases (hard market).

underwriting resultEarned premiums minus the cost of claims and operating expenses. It indicates whether premiums cover claims and expenses or not; it excludes the investment return, meaning that the insurance company could still book a bottom line profit even with an underwriting loss.

unearned premium reserveA reserve made to cover premiums written but yet to be earned (unearned premiums).

unearned premiumsUnearned premiums arise because, for instance, the premium on a 12-month non-life insurance policy written on 1 November covers only two months in the calendar year. 10/12 of the premium will be deemed unearned and reserved for at year-end.

unit trust (uk)A form of unlisted, open-ended investment fund; investors buy units in the fund from the asset management organisation.

unit-linked life insurancePolicyholder benefits under such a contract are expressed in units of an underlying investment vehicle, e.g. an investment fund, instead of being expressed in currency terms. As a result, they fluctuate with the value of the units and investment risk is transferred to the policyholder. Solvency requirements under EU regulation are much lower than for non-linked insurance business. The insurer is compensated with explicit management charges. 'Separate account' and 'variable annuity' are broadly equivalent expressions used in the US.

unitised with-profits business (uk)Policyholders are allocated units in the with-profits fund, and units are priced depending on annual reversionary bonuses. This is effectively mixing the 'with-profits' concept with the management structure of a unit-linked policy. A terminal bonus is also usually added at maturity. In the UK, with-profits business is now mostly written on a unitised basis.

universal life insuranceA life insurance product where there is flexibility in the payment of premiums and the level of death coverage, and where charges are disclosed. Mainly used for asset accumulation policies, where there is a savings component.

unrealised capital gainsSometimes referred to as 'hidden reserves', they arise when the value of investments reported on the balance sheet is inferior to the market value. Unrealised capital gains would then be reported off- balance sheet. The concept is not relevant where the full balance sheet is on a market value basis, e.g. in the UK.

variable annuities (us)US expression for unit-linked business

whole life policyA type of life insurance policy that provides lifetime protection; premiums must usually be paid for life. The sum assured is paid out whenever death occurs. Commonly used for estate planning purposes.

winding-upThe EU term for the liquidation of an insurance company - a rare event in insurance, and a very rare event in life insurance. See the difference with insolvency.

with-profits annuity (uk)An annuity contract where benefits are linked to the performance of a life insurance office's with-profits fund.

with-profits bond (uk)A life insurance savings policy, whereby a lump- sum payment is invested in the insurer's with-profits fund. Annual (reversionary) bonuses are added, and a terminal bonus is paid out at maturity.

with-profits fund (uk)A fund invested in a mix of equities, property assets and bonds used to back with-profits policies. It is effectively a form of participating fund. With-profits funds have historically been invested mostly in equities to benefit from the long-term performance of this asset class. Benefits allocated to policyholders are smoothed over time so as to remove part of the volatility of equities.

zillmerisationA method of calculating reserves in life insurance that allows for the acquisition costs incurred when a contract is written. Zillmerised reserves are lower than reserves that are not zillmerised. The method applies to regular premium business. It is effectively a variation of the net premium method, which increases the future premiums valued to take account of acquisition costs incurred.

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